Time to rein in the big banks

Wall Street, in characteristic fashion, is arguing that President Barack Obama's banking reform plans are populist exercises that would not have prevented the financial crisis of 2008. Indeed, some of the seeds of that crisis were sowed in political decisions to expand home ownership and keep inflation low.

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But the proposals Obama rolled out over the last two weeks — taxing a bank's risk, limiting bank consolidation and re-erecting a partial wall between commercial banks and their investment activities — are worthy of consideration in an era in which taxpayers have an interest in saving any financial firm considered "too big to fail." After 40 years of increasing deregulation of the financial markets, it's clear more safeguards are needed.

Unfortunately, Obama muddied the waters earlier this month when he tied his proposed bank fee to recouping $117 billion in losses from the Troubled Asset Relief Program approved by Congress in 2008. The losses stem largely from bailouts of automakers and American International Group — not banks, which have largely repaid their TARP loans.

The value of Obama's tax is that it is aimed at tempering the risk-taking by the 50 biggest banks. Taxes would not be levied on instruments that are backed by the Federal Deposit Insurance Corp. or the firm's primary capital. The only question may be if the proposed tax rate, 0.15 percent, is enough to influence decisionmaking. Some analysts have said it will amount to a 3 percent to 4 percent earnings cut for the smaller, regional banks caught in the net, such as BB&T. But 90 percent of the tax would be paid by the nation's 10 largest banks.

Critics have argued the taxes will just increase the cost of borrowing. But part of stabilizing the markets long term will be finding the balance between easy loans and prudent risk. And there are clearly details that will need to be addressed — such as concern the tax could hinder the Treasury Department's efforts to finance the deficit or that banks could avoid payment through restructuring.

Similarly, it will be the details of Obama's other initiatives announced Thursday that will determine if they significantly change Wall Street's culture. Capping banks' maximum liabilities, to bar consolidations, is commonsense prevention against creating more "too big to fail" firms.

But it's unclear how the cap will be implemented and what would actually change. Since 1994, no one bank has been allowed to hold more than 10 percent of the nation's insured deposits. Obama is proposing extending the cap to reflect all liabilities, but officials also said banks near the threshold would only be barred from buying other banks. They could still grow — suggesting the cap would have limited impact.

Obama is on the right track to partially embrace reinstatement of the Glass-Steagall Act, which for most of the last century prohibited banks and investment houses from merging. Obama's proposal, inspired by former Federal Reserve Chairman Paul Volcker, would prohibit banks that benefit from federal deposit insurance from gambling their capital in hedge funds or the market. That makes sense. Taxpayers should not be subsidizing banks' own investment activities.

The financial sector — in predictable self-interest — will resist regulation. And it's disturbing to contemplate what last week's U.S. Supreme Court ruling on campaign finance could mean for how the financial sector will try to influence the midterm elections to block reform. But forgoing reform would be an insult to taxpayers who bailed out the industry to ensure the Great Recession didn't become a depression. As Wall Street returns to its outsized bonuses, 10 percent of Americans remain out of work. After an era of deregulation, the industry has run out its leash. It needs to be reined in.